Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

ANALYSIS

The answer to complete and thorough analysis is to listen to the technical message: Who is gaining and who is losing control? This is your skeletal framework. Add the flesh of fundamental analysis and the mentality of market psychology, and you soon begin to more fully recognize and understand the behavior of this animal we call the stock market.

Which of five different candidates to pick? What determines the final ranking? The following are criteria for making the decision:

• Capitalization (need enough participants for the distribution curve).
• Presence and quality of a bullish divergence on the weekly chart.
• Reward/risk ratio.
• One-day volume surge.

At tops, in extended markets, weekly or longer charts have more substance and more validity. They will trump the message from daily charts. Look for weekly patterns—preferably breakouts of triangles with conflicting, weak-appearing daily charts that often trap shorts in a squeeze.

At market bottoms, daily charts carry more short-term weight in terms of foreshadowing potential strength around the corner.

Bearish Divergences

When you have divergences, always validate them by observing the price pattern that is contributing to the “apparent” weakness. If it is a price pattern that characteristically shows low volume and volatility as it consolidates its gains, then disregard the signal of the divergence; the pattern dominates in this case.

Never short a bullish price pattern. Never short a bullish price pattern containing a Classical ...